2011 WI 4
SUPREME COURT
CASE NO.: COMPLETE TITLE:
OF
WISCONSIN
2008AP322 Nestle USA, Inc., Petitioner-Appellant-Petitioner, v. Wisconsin Department of Revenue, Respondent-Respondent. REVIEW OF A DECISION OF THE COURT OF APPEALS Reported at: 322 Wis. 2d 156, 776 N.W. 2d 589 (Ct. App. 2009 – Published)
OPINION FILED: SUBMITTED ON BRIEFS: ORAL ARGUMENT: SOURCE OF APPEAL: COURT: COUNTY: JUDGE: JUSTICES: CONCURRED: DISSENTED: NOT PARTICIPATING: ATTORNEYS:
February 2, 2011 September 7, 2010
Circuit Dane C. William Foust
For the petitioner-appellant-petitioner there was a brief by Robert L. Gordon and Michael Best & Friedrich LLP and oral argument by Robert L. Gordon. For the respondent-respondent there was a brief by F. Thomas Creeron III, assistant attorney general with whom on the brief was J.B. Van Hollen, attorney general, and oral argument by F. Thomas Creeron III. An amicus brief was filed by Robert Horowitz and Stafford Rosenbaum LLP and Stephen C. Nick and City of Eau Claire and oral argument by Robert Horowitz. An amicus brief was filed by James Buchen and R.J. Pirlot for Wisconsin Manufacturers and Commerce, Inc.
2011 WI 4
NOTICE
This opinion is subject to further editing and modification. The final version will appear in the bound volume of the official reports.
No. 2008AP322
(L.C. No. 2006CV004401)
STATE OF WISCONSIN Nestlé USA, Inc., Petitioner-Appellant
:
IN SUPREME COURT
FILED
FEB 2, 2011
v. Wisconsin Department of Revenue Respondent-Respondent
A. John Voelker Acting Clerk of Supreme Court
REVIEW of a decision of the Court of Appeals.
Affirmed.
¶1
MICHAEL
J.
GABLEMAN,
J.
This
is
a
review
of
a
published decision of the court of appeals affirming the circuit court's judgment to uphold the determination of the Tax Appeals Commission.1 In late 2001, Nestlé finished constructing a plant Nestlé designed
(the "Gateway Plant") in Eau Claire, Wisconsin.
the Gateway Plant to meet rigorous United States Food and Drug
Nestlé USA, Inc. v. Wis. Dep't of Revenue, 2009 WI App 159, 322 Wis. 2d 156, 776 N.W.2d 589; Nestlé USA, Inc. v. Wis. Dep't of Revenue, Docket Nos. 04-M-101, 05-M-21, Wis. Tax Rptr. (CCH) ¶400-952 *34,130 (WTAC Nov. 29, 2006).
1
Administration ("FDA") standards for the processing of powdered infant formula. ¶2 After its completion, the Department of Revenue
("DOR") sent Mr. Curt Stepanek to assess the Gateway Plant for property tax purposes. In order to assess the property,
Stepanek had to complete two preliminary steps: 1) determine the "highest and best use" of the facility and 2) select and apply the appropriate assessment method to be used in determining its value. ¶3 Stepanek the made the Plant's following "highest observations and best while the
considering
Gateway
use":
plant had a number of expensive features which made it specially suited to produce powdered infant formula; Nestlé's greatest net return would come from the plant's continued use as a powdered infant formula production facility; and a likely purchaser of the Gateway Plant would be one of Nestlé's competitors in the powdered infant formula industry. that a Based the upon these Plant's formula
observations, "highest and
Stepanek best use"
concluded was as
Gateway infant
powdered
production facility. ¶4 Stepanek then considered which of two assessment
methods to use in determining the Gateway Plant's value: the comparable sales approach or the cost approach. He first
attempted to assess the Gateway Plant under the comparable sales approach. This approach uses market sales of properties that
are reasonably comparable to the subject property's "highest and best use" to predict the probable market price of the subject 2
property.
Stepanek could not find any powdered infant formula
production facility in the United States that had been sold for continued use as a powdered infant formula production facility. Because there were no comparable sales, Stepanek decided he
could not use the comparable sales assessment method. ¶5 Accordingly, Stepanek assessed the Gateway Plant based This method considers the cost
on the cost assessment method.
of building an exact replica of the structure to be assessed, less depreciation and tax-exempt components.2 assessment functional deduction method, the assessor from a the deducts Under the cost depreciation cost. for This
obsolescence occurs when
replication contains an
property
unmarketable
feature called a "super adequacy."3
Stepanek decided that all of
the Gateway Plant's specialized features could be marketed and
Reproduction cost represents the cost of an exact replica of the structure using the same materials, design, and quality of workmanship. Bureau of Assessment Practices, Wis. Dep’t of Revenue, Wisconsin Property Assessment Manual, 7-21 (2005) (hereinafter "Property Assessment Manual"). Stepanek used Nestlé's actual construction costs of $13,168,780 for the Gateway Plant as the baseline value of the improvements. He then subtracted 3% for depreciation and 25% for tax-exempt components. In total, Stepanek valued the Gateway Plant property improvements at $9,579,900. A property is super adequate when a prudent purchaser or owner would not include or pay for the "greater capacity or quality in the particular type of structure under current market conditions." Property Assessment Manual, at G-40. In other words, if a reasonable person shopping for a generic food processing plant would not place any value in the Gateway Plant's features that were specially designed for powdered infant formula production facilities, then those special features would be "super adequate." 3
3
2
sold for use in a powdered infant formula production facility. Because of this, Stepanek concluded that the specialized
features were not super adequate.
Thus, Stepanek denied any
deduction for functional obsolescence and assessed the property at $10,915,000.4 ¶6 Nestlé disagreed with Stepanek's assessment and hired Similar to the of a powdered
Mr. S. Steven Vitale to appraise the property. DOR's assessor, Vitale could find no example
infant formula production facility ever being sold for continued use as a powdered infant formula production facility. Because
of this lack of sales data, Vitale decided the Gateway Plant's "highest and best use" was not as a powdered infant formula production facility, but rather as a food processing plant.
Vitale then appraised the Gateway Plant by using the comparable sales approach. He used sales of food processing plants which
he believed were comparable to the Gateway Plant——not powdered infant formula production facilities. sales approach, Vitale appraised Applying the comparable the Gateway Plant at
$3,590,000. ¶7 Vitale also made an alternative appraisal under the He concluded that it would cost Nestlé $17,196,879 He then deducted $13,895,020
cost method.
to reproduce an identical plant.
4
Stepanek's initial assessment included $1,335,100 for the land value. The Tax Appeals Commission reduced the land's appraised value to $1,140,000. The DOR did not appeal this reduction. Thus, the Tax Appeals Commission determined the total assessed value of the property to be $10,719,900, which is the amount we affirm. 4
for
functional
obsolescence.
Vitale
included
such
a
large
functional obsolescence deduction because many of the Gateway Plant's FDA-required features had no value in the market for generic food processing plants. After other deductions,
Vitale's cost method appraisal totaled $3,430,000. ¶8 sufficient The determinative issue to is whether the Nestlé presented of
contrary
evidence
overcome
presumption
correctness that the Gateway Plant's "highest and best use" was as a powdered the infant formula production and facility. best use" The was DOR as a
argues
Gateway
Plant's
"highest
powdered infant formula production facility. no comparable sales of powdered infant
The DOR could find formula production
facilities that satisfied FDA regulations and instead based its valuation on a cost assessment method. Nestlé argues the
Gateway Plant's "highest and best use" was as a food processing plant. Nestlé did find comparable food processing plant sales
and argues it properly used them in its comparable sales method appraisal. ¶9 We conclude that Nestlé did not advance sufficient
evidence to overcome the presumption of correctness afforded to the DOR's assessment. Nestlé failed to introduce significant
evidence that no market existed for the Gateway Plant's sale as a powdered infant formula production facility. Also, we
conclude that the Tax Appeals Commission’s acceptance of the DOR’s determination that the Gateway Plant's "highest and best use" was as a powdered infant formula production facility is supported by substantial evidence. 5 Therefore, we hold that the
DOR
properly
used
the
cost
method
and
appropriately
denied
Nestlé a deduction for functional obsolescence. affirm the decision of the court of appeals. I. ¶10 BACKGROUND
Accordingly, we
Nestlé built the Gateway Plant in 2001 as a satellite
facility to its main plant, both of which are located in Eau Claire, facility Wisconsin. designed to The Gateway Plant is a special powdered purpose infant
produce
whole
protein
formula, and was specifically designed to meet FDA regulations in this field. The specialized features of the plant include: a
large spray dryer housed in a 122-foot-high spray-dry tower, ultra-sensitive processing reverse areas with specially treated antiequipment
microbial surfaces,
osmosis
water
treatment
designed to remove impurities from the city water, a waste-water treatment facility which lowers the pH of the waste before
discharge, and a fire pump house necessitated by the height of the spray dryer. These features added significant costs to the
Gateway Plant's construction. A. ¶11 The DOR's Assessment of the Gateway Plant
In 2005, the Department of Revenue assigned Mr. Curt
Stepanek ("Stepanek") to assess the Gateway Plant for property tax purposes. In order to assess it, Stepanek had to do two
preliminary steps: 1) determine the "highest and best use" of the facility and 2) select and apply the appropriate assessment method to be used in determining its value. significant conclusions in determining the He made three Gateway Plant's
"highest and best use."
First, he concluded that the plant had 6
a number of expensive features which made it specially suited to produce powdered infant formula. Second, Stepanek concluded
that Nestlé's greatest net return would come from continuing to use the Gateway Plant as a powdered infant formula production facility. Gateway Third, he concluded that a likely purchaser of the would be one of Nestlé's competitors in the
Plant
powdered infant formula industry.5
Based upon these conclusions,
Stepanek decided that the Gateway Plant's "highest and best use" was as a powdered infant formula production facility. ¶12 assessment Next, Stepanek to needed He to determine the appropriate the
method
use.
considered
two
methods:
comparable sales approach and the cost approach. sales approach uses market sales of
The comparable comparable
reasonably
properties to predict the probable market price of the subject property. Here, however, Stepanek could find no sales of
comparable powdered infant formula production facilities in the United States. food After examining sales of other, less-specialized plants, Stepanek eventually rejected the
processing
comparable sales approach. not reasonably comparable
He concluded that those plants were to the Gateway Plant because they
lacked the FDA-required features built into the Gateway Plant. ¶13 comparable Stepanek then used the cost approach instead of the sales approach. The cost approach values
improvements (such as newly constructed commercial buildings) by Stepanek testified that at the time he thought Mead Johnson, Abbott Laboratories, or Wyeth would be likely purchasers of the plant if offered for sale. 7
5
estimating the reproduction cost of the structure. for depreciation, functional obsolescence, and
Deductions tax-exempt
components are then subtracted from that estimated cost to reach a final value. ¶14 Stepanek valued the reproduction cost of the
improvements at $13,168,780. land, and subtracted for
He then added the value of the physical depreciation and exempt
manufacturing components to reach a total value of $10,915,000. Because the plant was new and operated specifically for its
purpose of manufacturing powdered infant formula, Stepanek did not reduce the 2003 or 2004 assessments for any functional
obsolescence. B. ¶15 performed ("Vitale"). Nestlé by Nestlé's Competing Appraisal submitted retained to its own appraisal, Mr. S. which was
its
expert, the DOR's
Steven Vitale
Vitale first
Similar
expert,
considered performing an appraisal under the comparable sales method. Vitale concluded that because powdered infant formula
manufacturers operate in a limited market, the Gateway Plant would be unlikely to sell for its continued use as a powdered infant formula production facility. of alternative uses for the After considering a number Vitale classified the
facility,
Gateway Plant's "highest and best use" as an unspecified food processing plant and not as a powdered infant formula production facility. six food Vitale then compared the Gateway Plant to sales of processing plants which had recently been sold and
8
which he believed were comparable to the Gateway Plant.6 upon his belief that the six facilities were
Based
reasonably
comparable to the Gateway Plant, Vitale valued the Gateway Plant at $3,590,000. ¶16 cost Vitale also made an alternative assessment under the He valued the and, reproduction among cost of the
approach. at
improvements
$17,196,879,
other
deductions, because he
subtracted $13,895,020 for
functional
obsolescence
believed that the FDA-required features built into the Gateway Plant were "super plant. adequate" for the uses of a generic food
processing $3,430,000.
Vitale's
cost-based
assessment
totaled
C. ¶17
Nestlé Challenges DOR's Appraisal
Nestlé filed a timely objection to the 2003 and 2004
assessments with the State Board of Assessors in each respective year and, as required by statute, paid its tax on the amount of the original assessment when the deadline arrived.7 The Board of
Assessors denied each objection and Nestlé petitioned the Tax Appeals Commission for review.8 Vitale did not specify which type of food processing plant would serve as the Gateway Plant's "highest and best use." He instead listed a number of potential uses, such as a pork processing plant, a cheese processing plant, a distribution/warehouse facility, a dry blend dairy manufacturing plant, a cheese manufacturing facility, and a butter manufacturing facility. Wis. Stat. § 70.84 (2003-04). All subsequent references to the Wisconsin Statutes are to the 2003-04 version unless otherwise indicated.
8 7 6
Nestlé, Wis. Tax. Rptr. (CCH) ¶400-952, at *34,130. 9
¶18 and
The Tax Appeals Commission consolidated both petitions with the DOR's assessment for both years. It
agreed
concluded that "the nonexistence of recent sales of specialized manufacturing plants does not mean that there is no market for such plants." Nestlé, Wis. Tax. Rptr. (CCH) ¶400-952 at
*34,136.
Agreeing with the DOR, the Commission stated that "the of correctness associated with the [DOR’s]
presumption
assessment of the improvements to the Gateway Plant has not been rebutted and there is credible evidence to support the
assessment."9
The Commission concluded that the DOR correctly
used the cost method and correctly denied Nestlé a deduction for functional obsolescence. ¶19 County Nestlé then Court. sought The certiorari circuit review the in the Dane C.
Circuit
court,
Honorable
William Foust presiding, found that Nestlé "failed to produce any evidence that the properties used in its comparable analysis were in fact comparable." Nestlé USA, Inc. v. Wis. Dep't of
Revenue, at 7, No. 06CV4401 (Dane Cty. Cir. Ct. Nov. 26, 2007). It found that the Tax Appeals Commission made "no finding of fact or conclusion that there is no market for the Gateway
facility."
Id. at 9.
The circuit court agreed with the DOR
that Nestlé failed to present sufficient contrary evidence to overcome the presumption of correctness that the Gateway Plant's
Id. The Tax Appeals Commission held that the presumption of correctness granted to the assessor was rebutted with regard to the value of the land. Neither party appealed this point. See supra note 4. 10
9
"highest production
and
best
use"
was
as
a
powdered further
infant review
formula from the
facility.
Nestlé
sought
court of appeals. ¶20 court. The court of appeals unanimously affirmed the circuit First, it agreed with the DOR that whether Nestlé could
find a buyer for the Gateway Plant for its continued use as a powdered Second, infant the formula of production facility was in dispute. of
court
appeals
concluded
that
the
burden
proving the absence of a market for the Gateway Plant's sale fell on Nestlé. Third, it held that——by itself——the fact that
powdered infant formula production facilities are rarely bought and sold did not per se mean that no market existed for their sale. The court of appeals concluded, as did the circuit court,
that Nestlé failed to present sufficient contrary evidence to overcome the presumption of correctness that the Gateway Plant's "highest and best use" was as a powdered infant formula
production facility. ¶21 granted. II. ¶22 On appeal STANDARD OF REVIEW the Commission, we review the Nestlé then petitioned this court for review, which we
from
Commission's decision, not the decision of the circuit court or the court of appeals. Wis. Dep't of Revenue v. Menasha Corp.,
2008 WI 88, ¶46, 311 Wis. 2d 579, 754 N.W.2d 95; Racine HarleyDavidson v. State, 2006 WI 86, ¶9 n.4, 292 Wis. 2d 549, 717 N.W.2d 184. subject to Statutory de novo interpretation and 11 we is are a question not bound of by law an
review,
administrative agency's decision.
Harnischfeger Corp. v. LIRC, The DOR argues that
196 Wis. 2d 650, 659, 539 N.W.2d 98 (1995).
in tax cases we should defer to the Commission's interpretations under at least a "due weight" deference. Nestlé argues that the Commission's See id. at 659-60. construction of an
unambiguous statute is entitled to no deference. reach this no question because we hold we that, affirm even the
We do not under the
stringent
deference
standard,
Commission’s
interpretation. ¶23 We uphold an agency's evidence" supports findings the of fact as long as
"substantial
findings.
Milwaukee
Symphony Orchestra, Inc. v. Wis. Dep't of Revenue, 2010 WI 33, ¶31, 324 Wis. 2d 68, 781 N.W.2d 674. This "substantial
evidence" test means that an agency's findings of fact may be set aside only when a reasonable trier of fact could not have reached them from all the from evidence that before it, Id. including The the
available
inferences
evidence.
DOR's
assessment is entitled to a presumption of correctness which may be overcome only if the challenging party presents significant contrary evidence. Stat. § Wis. Stat. § 70.995(13). Commission correct. showing "shall That by the See also Wis. that may that the be the
70.47(8)(i)(The valuation a is
presume
assessor’s rebutted by
presumption objector
sufficient
valuation is incorrect.") that we proceed.
It is in light of this presumption
III. DISCUSSION
12
¶24
The
question
before
us
is
whether
the
Tax
Appeals
Commission reasonably concluded that Nestlé failed to present sufficient correctness contrary given to evidence the to rebut the presumption In Part A, of we
DOR’s
assessment.
provide a brief overview of the Wisconsin real estate assessment framework. In Part B, we examine the Commission’s determination
that the Gateway Plant’s highest and best use is as a powdered infant formula production facility, and conclude it was
supported by substantial evidence.
In Part C, we review the
Commission’s application of the cost approach in assessing the Gateway Plant, and conclude it was also supported by substantial evidence. A. ¶25 assessment Overview of Assessment Framework
We first turn to a general overview of the real estate framework established by the Wisconsin Property
Assessment Manual (hereinafter "Property Assessment Manual")10, statutes, and case law. ¶26 The law requires that property taxes be levied upon
all real property in this state, except property that is exempt from taxation. property Wis. Stat. §§ 70.01-70.02. begin with Wis. Stat. The rules for real § 70.32(1), which
assessment
mandates that real property be assessed "from actual view or from the
10
best
information
that
the
assessor
can
practicably
Bureau of Assessment Practices, Wis. Dep't of Revenue, Wisconsin Property Assessment Manual, (2005). In the instant case, the parties cite to the Property Assessment Manual last revised in December 2004. Therefore, we also rely on the December 2004 version. 13
obtain, at the full value which could ordinarily be obtained therefore at private sale."11 requires adherence to the Wis. Stat. § 70.32. Property Assessment This statute absent
Manual,
conflicting law.
Walgreen Co. v. City of Madison, 2008 WI 80, Therefore, we examine the with basic principles of
¶3, 311 Wis. 2d 158, 752 N.W.2d 687. applicable statutes "in conjunction
real estate assessment as described by case law, treatises, and the Property Assessment Manual." ¶27 The Property Id., ¶19. Manual explains that,
Assessment
regardless of the assessment approach utilized by the assessor, all property must be assessed at its "highest and best use." The subject property’s highest and best use is "defined as that use which over a period of time produces the greatest net return to the property owner." Id. at 7-9. The Property Assessment
Manual dictates that the contemplated "highest and best use"
11
Wisconsin Stat. § 70.32(1) provides in full:
Real property shall be valued by the assessor in the manner specified in the Wisconsin property assessment manual provided under s. 73.03 (2a) from actual view or from the best information that the assessor can practicably obtain, at the full value which could ordinarily be obtained therefore at private sale. In determining the value, the assessor shall consider recent arm's-length sales of the property to be assessed if according to professionally acceptable appraisal practices those sales conform to recent arm's-length sales of reasonably comparable property; recent arm's-length sales of reasonably comparable property; and all factors that, according to professionally acceptable appraisal practices, affect the value of the property to be assessed.
14
must
be:
1)
legal, Id.
2)
complementary,12
and
3)
not
highly
speculative.
Additionally, our cases hold, and Chapter One
of the Property Assessment Manual provides, that the property must also be marketable for that use. Property Assessment
Manual, at 1-1 ("The law requires that the assessor assess all property . . . which has any marketable value"); State ex. Rel. Markarian v. City of Cudahy, 45 Wis. 2d 683, 686, 173 N.W.2d 627 (1970) ("The statutory rule of assessment of real estate is
restricted to its sale value in the open market . . . ."). ¶28 The Property Assessment Manual and our case law set
forth a three-tiered methodology for assessing real property’s full value at private sale. Markarian, 45 Wis. 2d at 686;
Property Assessment Manual, at 7-18 to 7-30.
Evidence of a
recent arm’s-length sale of the subject property is the best evidence of full value. Adams, 294 Wis. 2d 441, ¶34. If the
subject property has not been recently sold, then an assessor must consider sales of reasonably comparable properties. Id.
Only in situations where there has been no arm’s-length sale of the subject may property and there one are of no the reasonably third-tier comparable assessment
sales
an Id.
assessor
use
methods.
The Property Assessment Manual defines "complementary" as being "in balance with the uses of the property around it." Property Assessment Manual, at 7-9. This requirement stems from the principle of conformity, which stands for the proposition that "[t]he value of a property is increased when it conforms to the standards of a neighborhood." Id. at 7-11. 15
12
¶29 should
Under a
third-tier assessment "all the factors
approach,
an
assessor have a
consider
collectively
which
bearing on value of the property in order to determine its fair market value." include industrial property, "cost, Markarian, 45 Wis. 2d at 683. depreciation, location amount replacement and of occupancy, insurance These factors value, sales income, of like value
conditions, book value,
carried,
asserted in a prospectus and appraisals produced by the owner." State ex rel. Mitchell Aero, Inc. v. Bd. of Review of City of Milwaukee, 74 Wis. 2d 268, 278, 246 N.W.2d 521 (1976). The cost
assessment approach, which attempts to value the property based on its reproduction or replacement cost, is one of two thirdtier analytic methods.13 ¶30 these Manual, Adams, 294 Wis. 2d 441, ¶35.
In sum, when reviewing a decision of the Commission, Stat. case § 70.32, the Property provide Assessment guiding
sources——Wis. and our
law——together
the
principles of our review. B. The Commission’s Highest and Best Use Determination is Supported by Substantial Evidence ¶31 Nestlé argues that the Commission erred by failing to
apply the comparable sales approach in assessing the Gateway Plant, contrary to Wis. Stat. § 70.32(1). The comparable sales
approach requires an assessor to consider sales of "reasonably The other third-tier assessment method is the income approach. The income approach assesses property based on the amount of income it will generate over its useful life. Property Assessment Manual, at 7-26. Here, neither party argues the income approach is applicable. 16
13
comparable" properties.
See Wis. Stat. §
70.32(1).
If there
had been any reasonably comparable sales available, but despite such availability the Commission instead relied on a third-tier assessment method, the assessments would be invalid. Adams, 294
Wis. 2d 441, ¶37; Markarian, 45 Wis. 2d at 686, 173 N.W.2d 627; State ex. rel Keane v. Bd. of Review of City of Milwaukee, 99 Wis. 2d 584, 590, 299 N.W.2d 638 (Ct. App. 1980). ¶32 The first step in determining whether the Commission
erred in not using the comparable sales approach is to consider whether the Commission properly concluded the Gateway Plant’s highest and best use is as a powdered infant formula production facility. This is a threshold issue because the properties an
assessor identifies as "reasonably comparable" to the subject property for assessment purposes must be reasonably comparable to the subject property’s highest and best use. Forest Cnty.
Potawatomi Cmty. v. Twp. of Lincoln, 2008 WI App 156, ¶10, 314 Wis. 2d 363, 761 N.W.2d 31 (citing Property Assessment Manual, at 7-9 to 7-10). Therefore, a property’s highest and best use is often a determinative factor in the assessor’s decision on which assessment property. ¶33 As explained above, a subject property’s highest and approach to rely on in appraising the subject
best use must be: 1) legal, 2) complementary, 3) not highly speculative, and 4) marketable for that use. Property
Assessment Manual, at 1-1, 7-9.
Both parties in the instant
case agree that the Gateway Plant’s current use as a powdered infant formula production facility is legal, complementary, and 17
not highly speculative.
The crux of their dispute centers on
the fourth required element in determining a subject property’s highest and best use——that the use be one that is marketable. ¶34 The "marketable" requirement for a subject property’s
highest and best use stems from Wis. Stat. § 70.32(1), which requires that property be assessed at the "full value" the
property could receive in a "private sale."
Nestlé correctly
notes that this court has consistently interpreted Wis. Stat. § 70.32(1) to require that, when an assessor is determining the highest and best use in which a subject property for sale will produce its "greatest net return to the property owner," a
market for that property must exist. Holding Co. v. 631, Bd. 495 of Review of
See, e.g., Metropolitan City of (An Milwaukee, assessor 173
Wis. 2d 626,
N.W.2d 314
(1993)
cannot
"create a hypothetical market" or "pretend that a market exists" when determining a subject property’s fair market value);
Markarian, 45 Wis. 2d at 686 (An assessment must be based on a property’s "sale value in the open market and [not] its
intrinsic value"); State ex rel. Northwestern Mutual Life Ins. Co. v. Weiher, 177 Wis. 445, 448, 188 N.W. 598 (1922) (An
assessment cannot be based on an imaginary sale "to a supposed purchaser that does not in reality exist"). Therefore, if there
is no market in which the Gateway Plant could be sold as a powdered infant formula production facility, a determination
that the Gateway Plant’s highest and best use is as a powdered infant formula production facility would be invalid under Wis. Stat. § 70.32(1). 18
¶35 Plant in
Nestlé argues that there is no market for the Gateway its continued use as a powdered infant formula on its
production
facility.
Nestlé
relies
extensively
interpretation of the Commission’s Finding No. 26, which states in relevant part, "neither party could find any instance in the United States where a powdered infant formula manufacturing
plant was sold for continued use as a powdered infant formula manufacturing plant." at *34,132. in Finding Nestlé, Wis. Tax. Rptr. (CCH) ¶400-952,
Nestlé contends that the Commission, by concluding No. 26 that no actual sales of powdered infant
formula production facilities had been identified in the United States, is necessarily concluding that there is no market for powdered infant formula production facilities. ¶36 flawed. Nestlé’s interpretation of the Commission’s finding is The Commission concluded that neither party found an
instance in the United States where a powdered infant formula production facility was sold for continued use as a powdered infant formula production facility. This finding, however, is
not analogous to a finding that there is no market for powdered infant formula production facilities. Wisconsin Stat.
§ 70.32(1), our case law, and the Property Assessment Manual do not demand that evidence of actual sales of properties be put forward to satisfy the "marketable" requirement of a highest and best use determination. ¶37 Nestlé’s argument that the Commission found there is
no market for the Gateway Plant as a powdered infant formula production facility attempts to create a new requirement in our 19
case law where actual sales must be identified when determining a subject property’s highest and best use. This "actual sales"
interpretation, however, is inconsistent with the objectives of Wis. Stat. § 70.32(1) and would effectively convert our
established three-tier system for property assessments into a two-tier analysis. ¶38 subject The purpose in requiring that assessors determine a property’s highest net Manual, court and best to use the In is to ascertain a
property’s Property
"greatest
return at have
property other it is
owner." the to
Assessment and this
7-9.
words, improper
Legislature
concluded
assess a taxpayer’s property at a value that does not equate to what that taxpayer would receive for their property on the open market. This objective to determine a subject property’s fair
market value, however, does not require actual sales of other properties to be identified. property, especially a A market can exist for a subject property, without actual
special-use
sales data of similar properties being available. ¶39 The instant case illustrates this principle. Here,
the FDA implemented its new infant formula standards in 1997. When the Gateway Plant was completed in late 2001, it was the first powdered infant formula production facility constructed to meet these standards. Under such circumstances it is
unsurprising that no actual sales of powdered infant formula production facilities had occurred by 2003 or 2004. This,
however, does not inevitably lead to the conclusion that there is no market in which the Gateway Plant could be sold to a 20
potential infant
buyer
for
the
purposes it means
of
manufacturing that, in
powdered the young
formula.
Rather,
only
industry in which the Gateway Plant was designed and constructed to operate, no similar plants had yet been sold.14 ¶40 Nestlé’s "actual sales" interpretation would always
force assessors to look for active markets when determining a property’s highest and best use, even if the subject property already operated in a thriving, albeit limited, industry.15
14
This
The lack of actual sales of powdered infant formula production facilities in 2003 and 2004 is certainly relevant to a determination of whether a market exists for powdered infant formula production facilities, but it is in no way conclusive. Industry experts have recognized this approach in assessing special purpose properties:
15
is
a
flawed
Except for statutes or (faulty) jurisprudence in property tax matters requiring the alternate-use treatment, the highest and best use for viable special-purpose industrial facilities is the use for which they were constructed, unless proven otherwise. The theory that the assessments for property taxes of viable plants should be based upon alternate use arises from the notion that (1) there is a limited market for such properties and (2) the erroneous idea that the appraisal of the highest and best current use is "value-in-use" rather than a market value appraisal. Max J. Derbes, Jr., Non-Comparable Industrial Sales, The Appraisal Journal, Jan. 2002, at 41. When an appraiser is assessing a special purpose property where "the presence of an actual market for that property is extremely thin . . . it is generally recognized that conventional valuation techniques of sales comparison and income approaches are not applicable" because of limited comparable data. David Paul Rothermich, Special-Design Properties: Identifying the "Market" in Market Value, The Appraisal Journal, Oct. 1998, at 410. "Consequently, the cost approach is usually considered the only valid approach in value." Id. 21
requirement markets
would
result
in
subject at their
properties fair market
in
limited
being
assessed, not
value, but
rather at a value based on the subject properties’ costly and hypothetical conversions to alternative uses.16 ¶41 result Nestlé’s in "actual our sales" interpretation three-tier Under this would also
replacing with a
established approach.
assessment two-tier
framework
two-tier
approach, valid assessments would be based on only (1) recent sales of the property itself, or (2) recent sales of comparable properties. By requiring actual sales to be identified when
determining a subject property’s highest and best use, assessors would be required to broaden a property’s potential use further and further until actual sales could be located. This
interpretation of the "marketable" requirement for highest and
Nestlé complains that the Commission created a "hypothetical buyer" when assuming a market exists for the Gateway Plant in its continued use as a powdered infant formula production facility. While the premise of this argument rests on Nestlé’s "actual sales" interpretation that we reject today, it is worth noting that Nestlé is also creating a "hypothetical buyer" by assuming a potential buyer would purchase the Gateway Plant after it had been converted to a generic food manufacturing facility. Neither party put forward any evidence of actual sales of converted food manufacturing facilities that had once been powdered infant formula production facilities. This highlights a fact Nestlé overlooks throughout its arguments in this case: markets are necessarily forward-looking. Empirical evidence of past sales activity is certainly informative, but it is not conclusive. Other factors such as changes in consumer demand, industry regulation, and competitor behavior are also important and relevant considerations when engaging in market analysis. 22
16
best use determinations results in recent sales of reasonably comparable properties necessarily existing. This would, in
effect, render obsolete the third-tier assessment methodologies that are well established by Wis. Stat. § 70.32(1), the Property Assessment Nestlé’s Manual, "actual and sales" our case law. We of therefore the reject
interpretation
"marketable"
requirement for highest and best use determinations.17 ¶42 Plant’s powdered We find the Commission’s conclusion that the Gateway highest infant and best use is as its continued is use as a by
formula
production Stepanek,
facility DOR’s
supported
substantial primarily conclusion.
evidence. on three
the
assessor, reaching
relied this
pieces
of
evidence
in
First, Stepanek testified there were competitors in
the infant formula industry——Mead Johnson, Abbott Laboratories, and Wyeth——that could be potential buyers of the Gateway Plant. Second, Stepanek noted the infant food industry was strong and expanding its capacity. powdered infant formula Third, Stepanek found no evidence that production facilities had ever been
converted to other uses.
Nestlé also argues that if we accept the Commission’s conclusion that the Gateway Plant’s highest and best use is as a powdered infant formula production facility, we would be creating an impossible burden by requiring that Nestlé prove the absence of a market. Our case law, however, does not place that burden on Nestlé. In order to prevail in the instant case, Nestlé would have needed to present only sufficient contrary evidence showing that the Commission’s acceptance of the DOR’s highest and best use determination was incorrect. Adams, 294 Wis. 2d 441, ¶34. 23
17
¶43
The
only
evidence
that
Nestlé
presented
was
its
expert’s testimony that no powdered infant formula production facility had ever been sold in Wisconsin for its continued use as a powdered infant formula production facility. Nestlé
presented no evidence refuting Stepanek’s findings or otherwise suggesting there is no market for the Gateway Plant in its
existing use as a powdered infant formula production facility. ¶44 Based on the record before it, the Commission
reasonably concluded that the Gateway Plant’s highest and best use is as a powdered infant formula production facility.
Nestlé, relying exclusively on the fact that no actual sales of powdered infant formula production facilities had been found in Wisconsin, overcome failed to present of sufficient correctness contrary given to evidence to
the
presumption
Stepanek’s
testimony and report. ¶45 Because we agree with the Commission’s conclusion that
the Gateway Plant’s highest and best use is its current use as a powdered infant formula production facility, we further hold the Commission’s conclusion that the comparable sales approach was not appropriate for assessing the Gateway Plant is supported by substantial evidence. value of the subject The comparable sales approach bases the property on "the sales of reasonably
comparable properties." Both parties agree there
Property Assessment Manual, at 7-18. were had no recently sold food-related equipped the to
manufacturing manufacture
plants powdered
that infant
been
similarly Because
formula.
Gateway
Plant’s highest and best use is as a powdered infant formula 24
production general
facility,
we
agree
with
the
Commission upon by
that Nestlé
the as
food
processing
plants
relied
comparable sales were not "reasonably comparable" to the Gateway Plant. ¶46 Nestlé nonetheless argues that the Commission’s
decision to accept the DOR’s assessment and reject the sales comparison approach in assessing the Gateway Plant directly
contradicts our holding in State ex. rel. Northwestern Mutual Life Insurance Co. v. Weiher, 177 Wis. 445, 188 N.W. 598 (1922). We disagree. ¶47 original Northwestern Northwestern Mutual involved the assessment in of the
Mutual
headquarters
Milwaukee,
Wisconsin, for property tax purposes.
The subject property at
issue was "a fine, substantial, artistic building gracing half a block in the city of Milwaukee built to meet the peculiar needs" of Northwestern Mutual Insurance Company. Id. at 599. This
court concluded there was no market of potential purchasers with needs similar to Northwestern Mutual’s, consequently making it unjust to assess the property as if a hypothetical purchaser existed who would value and use the uniquely constructed subject property for the same purposes as Northwestern Mutual. ¶48 In the instant case, the Commission never concluded
that no market existed for powdered infant formula manufacturers in 2003 or 2004. In fact, Vitale, Nestlé’s own assessor,
testified a market existed:
25
Q: Let’s talk about markets for infant formula plants. Again, you—are you aware of any powdered infant formula plants selling? A: No.
Q. Okay. So, is it fair to say that there’s no market for powdered infant formula plants? A: You know, it’s hard to say no market, but I call it a limited market because of that. Vitale’s conclusion is consistent with Stepanek’s testimony that there were other powdered infant formula manufacturers in the United States that could be potential purchasers of the Gateway Plant. ¶49 Northwestern Mutual holds that, in situations where it
has been determined there is no potential market for the subject property, it is contrary to Wis. Stat. § 70.32(1) to conclude that the highest and best use of the subject property should remain the same. This case is easily distinguishable from
Northwestern Mutual.
In the instant case the DOR’s assessor,
the Commission, and even Nestlé’s own appraiser, all agreed a market existed for powdered infant formula production facilities in 2003 and 2004. Unlike Northwestern Mutual, where a "supposed
purchaser . . . [did] not in reality exist" for the subject property, both parties in the instant case have agreed that
there is at least a limited market for powdered infant formula production facilities. Id. Ultimately, Nestlé simply failed to
introduce sufficient evidence to support its argument that no market exists for the Gateway Plant to be sold in its continued use as a powdered infant formula production facility.
26
C.
DOR’s Application of Cost Approach is Supported by Substantial Evidence
¶50
Nestlé
argues,
in
the
alternative,
that
if
the
Commission’s decision to use the cost approach in assessing the Gateway Plant is correct, the DOR’s assessor’s application of the cost approach overvalued the property by failing to reduce the assessment for functional obsolescence. We find this
argument unpersuasive. ¶51 The cost approach method determines the value of
improvements by estimating the reproduction or replacement cost of the structure. Property Assessment Manual, at 7-21. Then,
deductions for depreciation, functional obsolescence, and taxexempt components are subtracted to reach a final value. ¶52 Id.
Nestlé argues that the special features incorporated
into the Gateway Plant for the production of powdered infant formula are "super adequacies" that should be deducted from the Gateway Plant’s assessment because they do not translate into market value as real estate. This argument, however, turns on
1) the classification of the Gateway Plant’s "highest and best use," and 2) whether components of the Gateway Plant are
functionally obsolete for that use. ¶53 and best We have already held that the Gateway Plant’s "highest use" is as a powdered infant formula production
facility.
Therefore, the only remaining issue to be resolved is
whether the specialized improvements that make the Gateway Plant suitable for the production of powdered infant formula are
27
functionally
obsolete
for
the
plant’s
continued
use
as
a
powdered infant formula production facility. ¶54 The Property as "the Assessment loss in Manual due defines to a "functional lack of or The
obsolescence"
value,
excessive utility."
Property Assessment Manual, at 7-26.
Gateway Plant was newly constructed and all of its FDA-required features were being utilized for the purpose of producing
powdered infant formula at the time of its assessments in 2003 and 2004. Nothing about the plant can be considered lacking Therefore, the primary issue existed as a result of
utility during this time period. is whether functional
obsolescence
"excessive utility" (also referred to as "super adequacy"). ¶55 The test for super adequacy is whether a "prudent
purchaser or owner would include or would pay for . . . [the greater capacity or quality] in the particular type of structure under current market conditions." at G-40. Nestlé is correct Property Assessment Manual, if the Gateway Plant’s
that
specialized features are not marketable, then Nestlé is entitled to a deduction for super adequacy.18
Nestlé is also correct in pointing out that the Commission mistakenly stated that no functional obsolescence can be found in situations where special features are currently functional for the present owner of the subject property. Whether the special features of a subject property are functional for the present owner is irrelevant to the question of whether functional obsolescence exists for assessment purposes. The key issue in determining if deductions are appropriate for functional obsolescence is whether the special features of the subject property will be functional for a potential buyer. 28
18
¶56
Nestlé’s argument is unpersuasive, however, because we
consider only whether the FDA-required features are marketable in the powdered infant formula production facility sales market. This is so because the market is defined by the property’s
"highest and best use" both when we consider which assessment method to use and when we consider the appropriateness of a deduction for functional obsolescence. Prudent purchasers of
powdered infant formula production facilities would value the Gateway Plant’s specialized features because these features are required by FDA regulations and are therefore necessary to the operation of such a plant. ¶57 Further, we need not consider whether the FDA-required
features are marketable in the broader market of general food processing plants because we have already found them to be
marketable in the context of the narrower, relevant market in which the Gateway Plant operates. ¶58 A reasonable trier of fact could have concluded the specialized features of the Gateway Plant are marketable and Nestlé has not advanced any evidence that the specialized
features of the Gateway Plant are unmarketable if the Gateway Plant is sold as a powdered infant formula production facility—— its highest and best use. Therefore, we hold that Nestlé has
not overcome the presumption of correctness enjoyed by the DOR, and that the court of appeals properly denied Nestlé a deduction for functional obsolescence. IV. CONCLUSION
29
¶59
We
conclude
that
Nestlé
did
not
advance
sufficient
evidence to overcome the presumption of correctness afforded to the DOR's assessment. Nestlé failed to introduce significant
evidence that no market existed for the Gateway Plant's sale as a powdered infant formula production facility. Also, we
conclude that the Tax Appeals Commission’s acceptance of the DOR’s determination that the Gateway Plant's "highest and best use" was as a powdered infant formula production facility is supported by substantial evidence. DOR properly used the cost method We therefore hold that the and appropriately denied
Nestlé a deduction for functional obsolescence. affirm the decision of the court of appeals. By the Court.—The decision of the court
Accordingly, we
of
appeals
is
affirmed.
30
